Presses to grind to a halt as print passes its sell-by date

The Seattle P-I has joined a growing list of advertising-starved newspapers to throw in the towel, close the office and head for the internet. And this is a trend which is likely to continue, writes James Robinson

It was not the first American paper to disappear - and it is unlikely to be the last - but images of weeping journalists embracing at the offices of the Seattle Post-Intelligencer last week seemed to touch a nerve in newsrooms around the world. Only a dramatically slimmed-down version of the 146-year-old paper locally known as the "P-I" will survive online.

After years of losses at many titles, and a long debate about how to respond to the threat posed by the internet, newspapers have reached a tipping point - and the industry faces an uncertain future. More than 70 US titles have closed so far this year, with the loss of more than 5,700 jobs, according to Paper Cuts, a US website which monitors the industry.

In the UK, dozens of titles have closed in the past 12 months and consultant Deloitte predicts that one out of every 10 print publications will have to reduce how frequently they publish, go online-only, or close down in 2009. No owner is unaffected. Earlier this month, GMG Regional Media, part of the Observer's parent company Guardian Media Group, announced extensive job cuts at its local titles, including the Manchester Evening News and the Reading Evening Post, with 113 journalists likely to be made redundant, according to GMG chief executive Carolyn McCall, who emailed staff last week to explain the decision. Profits at the division will fall by 85% in the current financial year, she warned, "and the trend is worsening". The Independent's owners are reportedly about to enter talks with creditors after finding themselves unable to pay a £188m bond due in May.

Industry Cassandras have been predicting for years that newspaper advertising revenues would disappear online, never to return. Diminishing profits would eventually make it impossible for proprietors to make papers pay, they warned. The global recession and subsequent collapse in advertising - most analysts expect it to fall by around 10% this year - has brought that day a step closer, according to some of the media industry's most powerful figures. "These questions have been around for a while," says John Ridding, chief executive of the Financial Times. "But they have become more urgent because of... recessionary pressures."

"The critical issue is you've got a structural industry change [content moving online] coinciding with a cyclical challenge [the advertising downturn]," says Sir Martin Sorrell, chief executive of advertising giant WPP. Sorrell believes the future for papers is bleak, arguing that owners made a colossal miscalculation when they chose to place content online for free, in a bid to attract traffic, before working out how they could make money on the web. "It was a terrible [decision] not to charge for content and if they were going through it again I think newspapers and magazines would [charge] but once you've given it away there's no going back."

Publishers of local and national titles which have built powerful internet businesses argue that internet users expect to receive content, particularly news, for free, which prevents them from charging for their online offerings. There are other ways of recouping that investment, including advertising, e-commerce and creating specialist sites users might pay for, but few are lucrative enough to meet the cost of producing a website, let alone a newspaper. Despite large audiences online - the Guardian currently has just under 30m monthly unique users - revenues remain tiny when compared to the cash generated by print products.

"Today's [digital] revenue is not enough to cover the fixed costs of running a newspaper," says Paul Zwillenberg, a partner at consultancy OC&C, who has advised some of Britain's biggest newspaper groups. "When you have a high fixed-cost base, the economics just don't add up." Sorrell says that he thinks it will be "very difficult, if not impossible" for newspapers to replicate print revenues in the new digital world.

The recession is amplifying these difficulties, says McCall. "Regional publishers are caught between the immediate impact of the downturn and the effects of longer-term changes, such as classified advertising revenues moving online. The recession is amplifying these effects, and the resulting falls in revenue have been dramatic. And because there are structural factors at play, revenues will not return to old levels even when the economy recovers. We need a new model with much lower costs and, when the biggest cost by far is people's salaries, it's impossible to do this without reducing the number of people we employ."

Zwillenberg says the prognosis for local titles, in particular, is poor. "Regional newspapers in the US and local newspapers in the UK used to rely on retail and leisure, jobs, motoring, property and cover price. Three out of the five have largely gone." Those revenues have disappeared to property or recruitment websites, few of which are owned by newspaper groups.

National titles are less reliant on classified advertising, but the loss of jobs and property ads is still felt keenly, with the pain amplified in recent months as companies slash their marketing budgets.

Internet advertising is still growing but the rate of increase has slowed, and the prices newspapers can charge for online advertising are falling, largely because an explosion of new internet sites have flooded the market with cheap ad space, or "inventory" in industry jargon, which has driven rates down. According to media regulator Ofcom, internet advertising rose by an average of 70.2% each year in the five years to 2007, when it was worth £2.8bn out of a total UK advertising market of more than £14bn. But the vast majority of online ad revenue is soaked up by search engines - £1.6bn of the £2.8bn total - and a single company, Google, dominates that space.

It is little wonder that some publishers are furious Google makes their content available to its users free of charge.

But if the old model is broken, what will replace it? The most radical solution is the one chosen by the Seattle P-I, which has reduced its cost base in line with its revenues, surviving online with 20 journalists rather than the 120 it previously employed. It is already one of the most popular news websites in the US, according to Nielsen NetRatings.

Also very successful is the Huffington Post, which - like similar news startups - has from its inception employed only a handful of journalists and used blogs from contributors who are paid little or nothing at all. The Post launched in May 2005, and claims to break even, although senior industry figures dispute that.

For existing media giants, the challenge is how to travel from old world to new, while using existing profits - or borrowing heavily - to fund their transformation, creating additional new digital revenues along the way. Both the FT and the Wall Street Journal have introduced subscription models, and the FT says it has dramatically reduced its dependence on print advertising. Digital advertising and subscriptions will generate 19% of its revenue this year, the paper says.

The low cost of online content is allowing the FT to introduce new services, including a subscription-only product, China Confidential, which launched last month. "Distribution costs are virtually zero so we are able to create specialised content and deliver it to digital niches," says Ridding. "I'm unfashionably optimistic that news media can be successful and make a profit online, but it has to be a combination of revenue streams and it has to involve paid-for content."

Ridding concedes, however that "it's easier for specialist franchises" such as the FT and the WSJ: WSJ.com has 1 million paying subscribers.

Publications with a more general readership are competing with websites that aggregate content created elsewhere and are, as Sorrell says facing "competition from people who don't fell trees and distribute through archaic delivery systems". Unlike newspapers, sites such as Google news and Digg.com are also unencumbered by the huge cost of paying editorial staff, he adds.

But not everyone shares Sorrell's pessimistic view of the future of newspapers. Zwillenberg argues titles can survive if they specialise. "You've got to know who your consumer is and make sure you focus on them like a laser beam," he says. "The FT and the WSJ will extract subscription revenues. The Guardian is growing online because it's tapped into a global liberal base. The Mail online is doing fantastically well, driven in large part by its entertainment coverage."

Zwillenberg says where titles lose out is when they try to be "all things to all people", which can alienate core readers. "Clearly it's easier for specialist franchises but frankly all publications need to take a hard look at what makes them different," Ridding says. "Most newspapers have pretty strong brands, so they've got their audiences and the potential to develop specialist sites. The issue is to differentiate and make sure you have a very close relationship with your audience."

Alternative sources of revenue are also growing, according to Edward Roussel, digital editor at Telegraph Media Group. "We're encouraged by some recent experiments, including e-commerce partnerships - but they are incredibly hard to crack," he says. "UK e-tailing is a £50bn business. Display advertising is a £1bn business. So you've got a load of websites chasing £1bn instead of £50bn."

Technologies that are still in their infancy could yet bring newspapers profits, says Alison Smale, executive editor of the International Herald Tribune, which is owned by the New York Times Group. "The IHT, with no marketing spend, has sold hundreds of subscriptions on Kindle [Amazon.com's digital reading device]," she says.

But in the short-term, salvation could come in the most unlikely of forms. An advertising recession could prompt internet giants, including YouTube and Facebook to introduce charges. Sorrell points out: "They were funded by venture capitalists who were prepared to chase volume, rather than profits." In the current climate, however, their owners may demand some return on their investment."

And if Facebook and YouTube are forced to replace lost advertising revenue, they may not be able to give away their content for free either. That could give newspapers the best chance of survival, although it will still be too late to save the Seattle P-I from extinction.